Brazil utilities baulk at gov't plan for cheaper electricity

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* President Rousseff promised 20 pct drop in electric bills

* Big utilities reject terms for renewal of concessions

* Cheaper power could slow inflation by half a percentage point

By Leonardo Goy

BRASILIA, Nov 8 (Reuters) - Refusal by large Brazilian power utilities to renew their concessions on the government’s terms has put in doubt the viability of President Dilma Rousseff’s plan to lower electricity costs to spur economic growth.

Minas Gerais state electricity company Cemig decided not to renew concessions for three of its hydroelectric dams that produce 2,500 megawatts (MW).

The Sao Paulo state utility Cesp and power transmission company Cteep are also expected to reject the extension of their concessions in exchange for its commitment to provide cheaper electricity.

“Obviously, if the utilities do not renew their concessions, the goal set by the president will be in trouble,” said electrical energy researcher Nivalde de Castro of the Federal University of Rio de Janeiro.

Rousseff unveiled the plan to lower some of the world’s highest energy bills by an average 20 percent on Sept. 11.

The reductions are part of a plan to modernize Brazil’s economy by making energy cheaper, since the high cost of electricity has long been seen as a drag on investments by big industry, corporate balance sheets and consumer pocketbooks.

Combined with additional reductions in taxes and other fees included in power bills, the plan would reduce rates by as much as 28 percent for industries and 16 percent for households, according to her government’s calculations.

The plan is based on revamped concession contracts granted to state and federally-run companies that generate and transmit electricity. Under the new terms the companies say the lower rates set by the government would not sufficiently compensate them for operating some of their hydroelectric plants and transmission lines.

Analysts said the plan would lower costs for some industrial companies but hammer the profitability of electricity companies. In fact, shares of utilities posted their biggest daily decline in more than five years the day after Rousseff announced her plan.

Government officials said they are confident that a majority of utilities will accept the concession renewal terms to keep their assets for decades more.

Those that refuse to renew the current contracts that expire between 2015 and 2017 will continue to charge higher prices, making it hard for the government to fulfill its promise of cheaper electricity as of the start of 2013.

Cesp, controlled by the government of Sao Paulo state which is in the hands of the opposition PSDB party, said it will challenge the new rates and the compensation offered by the government for its non-amortized investment.

If Cesp does not renew concessions for its Ilha Solteira, Três Irmãos e Jupiá hydroelectric plants, that would remove about 5,800 megawatts from Rousseff’s plan that is now awaiting Congressional approval.

Added to Cemig’s three generators and other smaller hydroelectric dams, the generating capacity included in the concession renewal plan would drop from 25,000 megawatts to 16,800 megawatts, or one third less that the government had counted on.

Cteep declined to comment on what it will do. On Wednesday, the Fitch rating agency said it was unlikely that the company would accept the early concession renewal offer.

Failure to deliver on her promise of lower electricity bills would not only be an embarrassment for Rousseff. It would also complicate her government’s efforts to contain inflation next year.

Brazil’s central bank estimates that the lower electricity rates would slow inflation by half a percentage point in 2013. The bank’s target for next year is to slow inflation to 4.9 percent. Without the planned cut in energy costs, that target will be harder to achieve, which could also affect the banks efforts to keep interest rates down.

In the 12 months through October, Brazil’s consumer inflation rose to 5.45 percent.